Hedge Funds: Performance, Risk, and Capital Formation

ABSTRACT

We use a comprehensive data set of funds‐of‐funds to investigate performance, risk, and capital formation in the hedge fund
industry from 1995 to 2004. While the average fund‐of‐funds delivers alpha only in the period between October 1998 and March
2000, a subset of funds‐of‐funds consistently delivers alpha. The alpha‐producing funds are not as likely to liquidate as
those that do not deliver alpha, and experience far greater and steadier capital inflows than their less fortunate counterparts.
These capital inflows attenuate the ability of the alpha producers to continue to deliver alpha in the future.